Production possibility curves(or production possibility frontier)
The PPC/F illustrates the concepts of choice and opportunity cost. If we
assume that a country only produces food and clothing, and that country
wishes to produce more clothes, then it would have to sacrifice the production
of some food. It is this sacrifice of food that is the opportunity cost of the extra
clothing.
We can also demonstrate the concept of increasing opportunity costs. In
other words that as a country produces more and more of one good it has to
sacrifice increasing amounts of the other. This occurs because different
factors of production have different properties, people have different skills,
land differs in different parts of the country et cetera. Therefore as a nation
concentrates more on the production of one good, it has to start using
resources that are less and less suitable (this is the concept of diminishing
returns). The production of more and more clothing involves a growing
marginal cost - ever increasing amounts of food have to be sacrificed for each
additional unit of clothing produced.
Give one of your own examples to help you remember:
It is because of increasing opportunity costs that the PPF is bowed outwards,
rather than being a straight line. In the diagram below we can see that as
production increases from x to y to z, so the amount of food sacrificed rises
for each additional unit of clothing produced. The opportunity cost of the fifth
million units of clothing is 1 million units of food. The opportunity cost of the
sixth million units of clothing is 2 million units of food.
Shifts of the PPF
The production possibility frontier will shift outwards when
there are improvements in productivity and efficiency from the available
factor resources
There is an increase in productive potential following an improvement in
technology. This may be specific to one industry or (more likely) the
technological break-through may have advantages for many industries in an
economy. The diffusion of new technology is sometimes called a "positive
spill-over effect"
More factor resources are exploited (perhaps due to an increase in the
available workforce or a rise in the amount of capital equipment available for
businesses to use). New natural materials (land) may also become available
for the production process.
IMPROVED TECHNOLOGY IN THE COMPUTER INDUSTRY
An outward shift of the frontier shown in the (diagram above) implies that the
opportunity cost of production has fallen. The improvement in technology is
assumed to affect the notebook computer producers only.
AN INCREASE IN TOTAL FACTOR PRODUCTIVITY IN THE ECONOMY
AS A WHOLE
If whole economy productivity improves the production possibility for all
goods and services increases. This implies an expansion in the potential
output for the economy and clearly has important implications for long-run
living standards. If more output can be generated from the same resources,
the economy is better able to meet the needs and wants of consumers. Real
output per head should rise over time.
Productivity growth is vital in determining the long run average growth rate
for most economies.
Despite the outward shift of the PPF, the basic problem of scarcity and
associated trade-offs between different levels of output of two or more goods
and services still remains.